Thursday, November 15, 2007

Inequality Between Universities: Endowments

By Richard Vedder and Thomas G. Ruchti

An interesting phenomenon in the last generation is that the elite private schools have grown far more prosperous than other institutions. It appears that the gap between the "rich" and "poor" schools is growing. For example, average salaries of professors have risen far more in the elite private universities than in the top public ones. Even the average SAT score gap has widened and more of the increasingly wealthy private schools buy the best students regardless of their family economic status.

The same thing appears to be true of college endowments. We took 105 of the highest endowment schools (nearly all of the richest institutions) and calculated a Gini coefficient to measure inequalities in endowment size. A Gini coefficient of 0 would mean perfect equality--all schools had the same endowment. A Gini coefficient of 1 would be perfect inequality--one school had all the money, the other 104 had nothing. With respect to income distributions, a Gini of over .40 usually indicates considerable inequality, while for family wealth distributions, a high Gini would be around .50.

In 1999, the Gini coefficient for this large sample was 0.514 --pretty high (Harvard was dozens of times wealthier than schools like SUNY Buffalo or DePauw). Interestingly, the Gini rose every single year after 1999, reaching .561 in 2005. The gap between the richest and poorest grew very substantially --in a sample where the "poorest" are actually moderately prosperous schools. If all schools were included, the Gini probably would have been much higher --exhibiting vastly greater inequality than we observe in distributions of household wealth.

This has tremendous implications for public policy. We suspect that federal tax and subsidy policies in general have worked to increase inequality. Independent of that, the case for treating Harvard the same as SUNY Buffalo and Bucknell University weakens the greater the disparity between these schools becomes fiscally. As Charlie Rangel pushes the Mother of All Tax Reforms in the House, and Senators Baccus and Grassley contemplate the tax exempt status of universities in the Senate, they might want to ask whether Harvard, with two million dollars of endowment for every student, should be treated the same as schools like the one we are writing this from (Ohio University), with per capita endowments of only one-half of one percent as large.

Richard Vedder directs the Center for College Affordability and Productivity while Thomas G. Ruchti is an undergraduate mathematics major at Ohio University.